Why Osborne's new lending scheme won't work

If consumers are determined to hoard cash, who will borrow?

The likelihood is that George Osborne's new bank lending scheme, announced last night in his Mansion House speech, will neither revive the economy nor the Tories' moribund poll ratings (they currently trail Labour by 12 points).

Osborne has always said that he and David Cameron are "fiscal conservatives but monetary activists" and more monetary activism is what we're getting. Under a new "funding for lending" scheme, worth up to £80bn, the Bank of England will provide cheap loans to banks for several years, at below market rates, in exchange for them lending the money to households and small and medium-sized businesses. In addition, the snappily-titled Extended Collateral Term Repo Facility will lend banks a minimum of £5bn a month in the form of six month loans to them. The aim of both schemes is to stimulate the economy by increasing loans to credit-starved businesses and households. But will they work? Almost certainly not.

There is increasing evidence that the UK is caught in a liquidity trap, a situation in which confidence is so low that looser monetary policy (e.g. increasing the money supply or lowering interest rates) has no positive effect on the economy. If consumers and businesses are determined to hoard cash (as is common in a recession), then the new loans will not be taken up. As for those willing to borrow, many are so indebted that the banks won't lend to them anyway. Put simply, the creditworthy won't take loans and the uncreditworthy won't get them.

It is in such circumstances that the government must act as a spender of last resort and engage in fiscal stimulus (higher spending and lower taxes), as Ed Balls has repeatedly argued. Since Osborne is so fond of boasting of the UK's historically low bond yields (although they owe more to the Bank of England's quantitative easing programme than to his deficit reduction programme), the least he could do is take advantage of them. He should increase borrowing to fund higher infrastructure spending (the most effective stimulus, according to the Office for Budget Responsibility) and tax cuts.

As for the politics, they're not great for Osborne either. As Tory MP Douglas Carswell, an increasingly vociferous critic of the Chancellor, noted on Twitter: "Print-money-and-give-to-banks (govt) V Print-money-and-give-ppl (Balls). Guess which will play better in studio debates?"

In a recent essay in the New York Review of Books, Paul Krugman sagely observed that "the economic strategy that works best politically isn’t the strategy that finds approval with focus groups, let alone with the editorial page of The Washington Post; it’s the strategy that actually delivers results." If Osborne wants to restore his political reputation (he is both Chancellor and the Tories' chief election strategist) and give the Tories a faint hope of forming another government, he should adopt a plan that works. But first he must learn the lesson of the 1930s - you can't cut your way out of a recession, but you can spend your way out of one. And in these depressed times, only big government has the firepower to do so. 

Chancellor George Osborne delivered his annual Mansion House address last night. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Photo: Getty Images
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The Fire Brigades Union reaffiliates to Labour - what does it mean?

Any union rejoining Labour will be welcomed by most in the party - but the impact on the party's internal politics will be smaller than you think.

The Fire Brigades Union (FBU) has voted to reaffiliate to the Labour party, in what is seen as a boost to Jeremy Corbyn. What does it mean for Labour’s internal politics?

Firstly, technically, the FBU has never affliated before as they are notionally part of the civil service - however, following the firefighters' strike in 2004, they decisively broke with Labour.

The main impact will be felt on the floor of Labour party conference. Although the FBU’s membership – at around 38,000 – is too small to have a material effect on the outcome of votes themselves, it will change the tenor of the motions put before party conference.

The FBU’s leadership is not only to the left of most unions in the Trades Union Congress (TUC), it is more inclined to bring motions relating to foreign affairs than other unions with similar politics (it is more internationalist in focus than, say, the PCS, another union that may affiliate due to Corbyn’s leadership). Motions on Israel/Palestine, the nuclear deterrent, and other issues, will find more support from FBU delegates than it has from other affiliated trade unions.

In terms of the balance of power between the affiliated unions themselves, the FBU’s re-entry into Labour politics is unlikely to be much of a gamechanger. Trade union positions, elected by trade union delegates at conference, are unlikely to be moved leftwards by the reaffiliation of the FBU. Unite, the GMB, Unison and Usdaw are all large enough to all-but-guarantee themselves a seat around the NEC. Community, a small centrist union, has already lost its place on the NEC in favour of the bakers’ union, which is more aligned to Tom Watson than Jeremy Corbyn.

Matt Wrack, the FBU’s General Secretary, will be a genuine ally to Corbyn and John McDonnell. Len McCluskey and Dave Prentis were both bounced into endorsing Corbyn by their executives and did so less than wholeheartedly. Tim Roache, the newly-elected General Secretary of the GMB, has publicly supported Corbyn but is seen as a more moderate voice at the TUC. Only Dave Ward of the Communication Workers’ Union, who lent staff and resources to both Corbyn’s campaign team and to the parliamentary staff of Corbyn and McDonnell, is truly on side.

The impact of reaffiliation may be felt more keenly in local parties. The FBU’s membership looks small in real terms compared Unite and Unison have memberships of over a million, while the GMB and Usdaw are around the half-a-million mark, but is much more impressive when you consider that there are just 48,000 firefighters in Britain. This may make them more likely to participate in internal elections than other affiliated trade unionists, just 60,000 of whom voted in the Labour leadership election in 2015. However, it is worth noting that it is statistically unlikely most firefighters are Corbynites - those that are will mostly have already joined themselves. The affiliation, while a morale boost for many in the Labour party, is unlikely to prove as significant to the direction of the party as the outcome of Unison’s general secretary election or the struggle for power at the top of Unite in 2018. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.